Oil Price Projections Weigh Heavy on MRO Market

Maintenance, repair and overhaul market projections revealed at Aviation Week’s MRO Conference & Exhibition mark 2010 as the bottom of the recession’s trough, though they note that many of its effects have not been felt yet and other factors, such as fuel costs, could throw any forecasts off course. As AeroStrategy Partner Kevin Michaels puts it, “If oil hits $150-$200 per barrel, all bets are off.”

Global MRO spend will be up 10.8% in 2011, to $46.9 billion, according to TeamSAI’s most recent forecast. Dave Marcontell, president of TeamSAI M&E Solutions, says, “We believe that 2010 marked the bottom of the business cycle.” He adds that fleet changes alone, which primarily consist of renewals, drives 3.2% of that increase. For the decade 2011-2021, Marcontell’s firm projects a 3.5% average compound annual growth rate (CAGR), with the market growing to $56.4 billion by 2016, and $69 billion by 2021.

AeroStrategy takes a slightly more conservative tack, putting its figure at $43.6 billion for 2011, with a 3.3% CAGR led by engine maintenance and airframe modifications. By 2019, it projects a global market value of $58.4 billion.

But, fuel prices will make all the difference this year. Chris Markou, assistant director of operations at the International Air Transport Association (IATA), notes that maintenance made up 13% of airlines’ total operational costs of $524 billion in 2010, compared to the around 30% allotted to fuel costs. A long-haul carrier might set aside as much as half of its operational budget for fuel, Markou says.

If fuel costs stay between $80 and $100 per barrel, AeroStrategy’s Michaels projects low, double-digit growth for 2012, assuming global GDP growth of 2-3%. A best case scenario would see fuel costs fall below $80 per barrel, heralding the return of hundreds of parked aircraft needing maintenance into the fleet, propelling a big surge in MRO activity. Michaels points out that this situation isn’t unprecedented; it happened in 2005, after the trough that followed 9/11. The worst case scenario would see oil rise above $110 per barrel, potentially triggering a “w”-shaped recession and sending more fuel-hungry aircraft into storage.

The most recent recession introduced new rigor in capacity management by airlines, and MROs felt the impact of that new discipline keenly. The 1% decline in capacity between 2009 and 2010 translated into a 16% airline profit but a 7.5% decline for MRO, says TeamSAI’s Marcontell. Michaels explained the same trend slightly differently: of new-delivery aircraft, only about 60% contribute to new growth. About 40% of new aircraft deliveries compensate for the 400-500 aircraft being retired annually.

The combination of fleet retirements and destocking means that maintenance providers have been using more repaired parts and have not felt fully the impact of smaller inventory holdings. According to IATA’s Markou, the average value of inventory held by airlines per aircraft is about $1.9 million, though carriers in Asia Pacific and the Middle East tend to hold much more inventory than those in other world regions.

Due to this destocking trend, data shows the air transport market taking advantage of alternative options for parts repair and acquisition. Michaels says that in 2010, air transport spent $12.3 billion on new OEM parts. At the same time, around $6 billion went to alternatives: $0.4 billion to parts manufacturer approval or PMA parts, $2.3 billion on surplus parts (Michaels notes that some say this figure realistically is higher—a CFM56 overhaul today might use 90% surplus parts), and $3.1 billion to internal parts repair and FAA DER repairs.

Michaels says that while internal repairs represent a current spend nine times that of PMAs, PMA has a greater impact on the market and the industry because of its impact on OEM pricing power.